What is the definition of compensation?

The "definition of compensation" for a 401(k) plan refers to the types of income that are considered eligible for contributions to the plan and, in some cases, used to calculate employer matching contributions or other employer contributions.

The IRS provides guidelines for what constitutes eligible compensation for 401(k) plans. Generally, eligible compensation includes:

Wages and Salaries: This includes base salary, hourly wages, and any bonuses or commissions received by the employee.

Overtime Pay: Compensation for hours worked in excess of standard full-time hours may also be considered eligible compensation.

Commissions and Bonuses: Additional compensation such as commissions, bonuses, or incentive payments may be included as part of eligible compensation, depending on the plan's terms.

Vacation Pay and Sick Pay: Compensation for vacation time or sick leave may be considered eligible compensation, depending on the plan's terms.

Certain Non-Cash Compensation: In some cases, non-cash compensation such as certain fringe benefits or employer contributions to employee benefits plans may also be considered eligible compensation.

It's important for employers to clearly define eligible compensation in their 401(k) plan documents to ensure consistency and compliance with IRS regulations. The definition of compensation may vary from plan to plan, so employees should review their plan documents or consult with their plan administrator to understand what types of income are considered eligible for contributions to their specific 401(k) plan.


The information contained herein is not intended as financial, legal or tax advice, and may not be suitable as required by specific circumstances. Please consult your financial planner, attorney and/or tax adviser as needed.